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Is the frenzied on-demand grocery delivery boom really sustainable?

Glynn Davis is one of the UK’s most knowledgeable and experienced retail journalists, founder of Retail Insider, and Ecommerce Age’s new monthly columnists.

Everybody knows of Deliveroo and Uber Eats but what about Getir, Gorillas, Asap, Dija, Zapp, Jiffy, Weezy and Snappy? This is the incredible number of grocery delivery services that have mushroomed up in the UK over recent months.

Against the backdrop of multiple lockdowns and the resultant explosion in online food ordering there has been a bonanza in funding for specialist providers of on-demand grocery delivery services. There has been an impressive $14 billion committed to a range of start-ups and larger players like Deliveroo and US-based Instacart, according to data from PitchBook. This frenzy of fundraising has led Getir and Gorrilas to achieve ‘Unicorn’ status (a valuation of over $1 billion) in only a matter of months.

As we come to the end of the various lockdowns the funding has actually accelerated, with more money committed during the first three months of this year compared with the whole of 2020. The most recent investor to jump on the bandwagon is former Sainsbury’s boss Justin King who has backed Snappy.

To King’s credit the Snappy model is a little different to the others (in that it works as a platform supporting convenience stores) but I’m less than convinced there is much mileage in any of these businesses. The way they have been differentiating themselves from each other has been through the questionable metric of speed-of-delivery.

Weezy bragged it could deliver an order in 15 minutes so Dija countered this with its 10-minute guarantee – and for a flat fee of a mere £1.99. Incredibly, Asap applies no delivery charges for its sub-20-minute service. As they spiral down to ever more unsustainable – and frankly dangerous speed-driven targets for their delivery guys – Weezy has sensibly emphasised product quality rather than the velocity of deliveries in its recent rebrand.

Now, I’ve not looked under the hoods of any of these businesses, and poked around among the numbers, but I just can’t see how the founders of these small start-ups can make the economics stack-up. The only way it works is through economies of scale but when the likes of Deliveroo and Uber Eats are struggling to make profits on their huge volumes – helped by a pandemic that’s well and truly juiced the numbers – then this is extremely worrying.

The model requires these services to be located in incredibly densely populated areas – which is why most of them have initially opened for business in London – and the hubs (within which they hold the stock) need to be literally on the door step of the customer base. To scale-up therefore requires investment in real estate and obviously the employment of an increasingly large on-demand rider network, which we all know can be quite a problematic area.

What makes the grocery delivery market particularly tough is that it is not only labour and property intensive but the margins of the commodity being delivered, groceries, are fag paper thin. It has been calculated that the only way to be profitable is for orders to be above £20 and many of those delivered by the plethora of players now in the market does not hit this threshold.

Like the rest of the retail industry there is a great reluctance to put in place any obstacles when it comes to online ordering and deliveries – whether it is higher charges on smaller sized orders, increased charges during peak periods, or charging for returned items etcetera. There is the great fear that the customer will simply jump ship and go to a rival. And they are likely correct when it comes to the grocery delivery providers because there are simply so many of them around right now.

From a customer perspective this is great as the proposition could hardly be more attractive – convenient, fast and good value. But it’s questionable how sensible it is for the service providers. When volumes drop after Covid-19 they will inevitably lose their attraction to the investors who have fuelled this frenzied activity in the category. I tend to agree with one prominent venture capital investor who suggests many of these young companies will get a “brutal education”.